Investing for the Long Haul

Buying and holding real estate

You don't have to look far to see people who seem to be making oodles of money by investing in real estate. Some of the most popular shows on HGTV have to do with finding, fixing and flipping run-down properties. This investment strategy can work well for those who like to do most of the dirty work. For the rest of us however, finding properties to buy and hold onto as rentals might be a more palatable strategy. Why invest in real estate? Over time, it always out-performs and out-appreciates the stock market. Done right, it can provide years of additional income - income that can be used for retirement, education costs, charity, etc. Certainly, the best time to invest in real estate is in a down market, for a number of reasons.

  • Homes are less expensive

  • There are more foreclosures and short sale properties available

  • More people have to drop out of home ownership for a variety of reasons; many of which lead to the previous point

  • These people still require housing. After having been in a home, have a yard and family, it is hard to return to apartments or into a multi-family environment. Which makes owning single-family homes as investments attractive.

By all accounts, we are in a seller's market. Prices are up and there is low inventory. This can make it more difficult to find those investment gems to repair, renovate, rent and manage.

If You Do This One Thing Right, Success in Real Estate Investing is Easy.

December 14, 2015

When does a beautiful diamond bracelet become a lousy gift? When she wanted an engagement ring.

He did everything right, dug deep and delivered what he thought was a guaranteed winner. So where did he go wrong? He didn't set the right expectations.

We've seen this mistake made by investors at all levels. Even from the folks who are armed with the best data, teams of analysts and years of experience. If you raised capital based on 2012 expectations and tried to deploy it in 2015, you experienced a head-on collision with a new reality. 

Investing for returns that the market can not readily deliver causes people to make mistakes and sacrifice quality - in location, construction, appeal and tenant credit worthiness. They chase a lower quality neighborhood and property with the presumption of a higher return, and they end up suffering many (or all) of the following:

- delinquent rent payments.

- higher maintenance costs.

- higher turnover and more vacancy.

- difficulty when they want to exit.

The return they saw on paper doesn't always materialize. The single family home as been mis-labeled as a purely opportunistic investment class by decades of "get-rich-quick" promotions and a lack of professional advice. That's not to say there aren't times and circumstances where 15-20% gains can be made, such as during the "housing meltdown" a few years ago. But now the market is in recovery, which is a good thing. Higher returns are possible, but knowing what to expect in a normal market is key.

The US housing market, at face value, returns a 4-7% yield plus 1-3% appreciation. What's face value? A median priced house in a good suburban school district, in move in condition, purchased at market price and rented for market rent. No brain damage. Low risk. High demand. Nice houses. Good credit tenants.

Some people don't think there are investment dollars that will jump at these numbers, but consider that there are billions invested every year in Class A commercial real estate that generates a lower return than detailed above. There are also trillions of investment dollars sitting on the sidelines in cash or low yield instruments. Clearly, investors are satisfied to trade higher rewards for lower risk and preservation of capital. Single family rentals are tailor made to provide a tidy return in a very stable asset that can be liquidated on demand (with 90 days lead time).

One reason this is gaining popularity now is the mainstreaming of a new way to invest in housing: Performing Rentals. Homes with tenants and management in place. Rentals that can be bought in packages, have a performance track record and generate positive cash flow on day one.

My headline is accurate. If you are happy with a modest 5% net yield and steady appreciation, there are good family neighborhoods in MSAs across the US that are open to you. If you want 10+ unleveraged returns, you might be headed for disappointment.

Another good article by BankRate about jumping into the real estate investment pool can be found HERE.